Share application money attracts tax

Section 269SS of the IT Act, 1961 (Act) prohibits taking of any loan or deposit from any person other than by an account payee cheque or account payee bank draft where the amount of such loan or deposit or the aggregate of these are Rs 20,000 or more. There is no definition of 'loan or deposit' in section 269SS. However, in section 269T, the term 'deposit" has been defined to mean 'deposit of money, which is repayable under notice or payable after a period and in the case of a person other than a company, includes deposit of any nature. Taking or accepting any loan or deposit in contravention of section 269SS is punishable u/s 271D of the Act, which could be a sum equal to the amount of loan or deposit so taken or accepted.

Share application money receipts

Joint stock companies, by and large, raise their capital through issue of shares. The process starts with the invitation through application with a part of money towards the value of shares being paid along with applications for shares in the company. The process of allotment and return of money to those, whom shares are not allotted, takes some time. In the meanwhile, the money received with applications remains with the company. The issue for consideration is whether during the period money remains with the company, which is to be appropriated to the company's account on allotment or is to be refunded for non-allotment can be considered 'deposit' and would attract section 269SS.

Jharkhand High Court's view

In its decision in the case of Bhalotia Engg. (P) Ltd. v. CIT, 196 CTR (Jharkhand) 619, a division bench of the high court has answered this query in the affirmative. The question referred to the HC was 'whether the acceptance of share application money in cash amounting to Rs 20,000 or more violates the provisions of section 269SS?' According to the court, the money paid to a company in support of an application for shares is a deposit of money in the company, which is repayable after the period of allotment comes to an end, or a decision is taken not to allot the shares. In this background, according to the court, there cannot be any difficulty in holding that the amount paid in support of the applications for shares must be considered to be a deposit till the allotment of shares or refund of the money.